Should Investors Pick Up the Pieces of World's Largest Car Alliance?

Former Nissan Motor (NSANY) chief Carlos Ghosn will cool his heels in a Japanese jail cell over the holidays and into 2019. Japanese prosecutors arrested him again on Friday, for the third time, stringing out their list of related alleged crimes in a way that keeps Japan's most-famous foreign executive behind bars.

He was first arrested on Nov. 19. Since then, he has likely been subjected to eight-hour interrogation days, without his lawyer present. It's enough to make you confess to whatever they want to say you've done.

The paper trail of consecutive arrests is a tactic prosecutors often use in Japan, in a way that can keep suspects behind bars for months, sometimes until their trial. A court had on Thursday unexpectedly declined the prosecutors' request to extend Ghosn's detention on previous charges. The new arrest lets authorities keep him behind bars another 10 days, with a potential 10-day extension, too. 

Ghosn has, quite rightly, railed against his continued jailing and inability to defend himself against a corporate coup. 

"Things as they stand are absolutely unacceptable," he is quoted through his lawyer as saying, on Japanese broadcaster NHK. "I want to have my position heard and restore my honour in court."

Greg Kelly, Ghosn's deputy and alleged co-conspirator, was not arrested again. His lawyer has asked for his release, which may happen after a long weekend in Japan. 

It could be a good opportunity for investors to stoop and pick up the pieces of the shattered triangle that is the Renault-Nissan-Mitsubishi Alliance. When viewed together, the group is the largest carmaker in the world. 

Nissan shares are down 21.4% this year, double the Nikkei 225 index's fall of 10.4%, and 12.2% since Ghosn was first detained. Mitsubishi Motors (MSBHY) shares are off 25.6% in 2018. Shares in the French automaker Renault (RNLSY) have declined 34.6% this year. 

Yet Nissan remains Japan's second-largest car company, behind only Toyota Motor. Renault, which like all three companies Ghosn saved from near-failure, had record sales in the first half of this year thanks to surging demand in emerging markets and solid sales in Europe. Mitsubishi, well, probably best leave that one alone!

The love triangle between the three means Renault owns 43% of Nissan, which in turn owns 15% of Renault. Nissan bought a controlling 34% stake in Mitsubishi Motors in 2016, after the serial standards-test cheater was caught manufacturing emissions data as well as cars.  

Whether that love triangle retains its bonds is now in major doubt. 

Soon after his November arrest, Ghosn was fired by Nissan and Mitsubishi. He remains at the nominal helm of Renault. 

His first arrest hardly sounded like a "gotcha" moment: that he had misstated his income, not to the company, which apparently knew about it and approved it, but to the stock exchange. 

Auto analysts have said it sounds suspiciously like a coup designed to remove Ghosn, in favor of his former protégé, Hiroto Saikawa. That's what I immediately assumed. 

Ghosn has been a massive name in Japan, rescuing a Nissan that was on the verge of bankruptcy and restoring its sheen. He starred in his own manga comic books, was mobbed for autographs, his every pronouncement major news on Japanese TV. The Brazilian-born Frenchman with a Lebanese background lent a cosmopolitan air to corporate Japan. 

Now his downfall is an equally massive story. Tales of Versailles parties and lavish spending, and Ghosn lording himself at Davos, paint "Le Cost Cutter" in a very different light. 

Saikawa was installed by Ghosn as CEO last year as his successor. He has been painted alongside the head of the chief executive's office, Malaysian-born Hari Nada, as a whistleblower. But it seems impossible to some that the CEO could not be aware of, or not retain some responsibility for, Ghosn's pay and actions.

"It's a coup. Ghosn's era is over," Tatsuo Yoshida, an analyst at Sawakami Asset Management and a former Nissan employee, said according to Bloomberg. "Saikawa is in a position to represent anti-Ghosn sentiment that's been building up for years within Nissan."

There had been talk of Renault taking over Nissan, a deal exploded by recent developments. Factions within Nissan appear to want it split from Renault. The French carmaker wants nothing of the kind. 

Saikawa took a month to make the trip to the Amsterdam headquarters of the Nissan-Renault-Mitsubishi alliance. The lag in explaining the situation to top brass has likely added to the frustration Renault has already expressed. 

Nissan's board, instead of naming a permanent replacement for Ghosn, says it will form a seven-member committee of external experts to examine and report on the company's governance policies, reporting back in March. Critics say that smacks of timewasting after Renault requested an emergency shareholder meeting that would let it appoint a new Nissan board member. Mitsubishi formed a compensation committee right away. 

Renault has actively demanded answers to just how closely Nissan, Saikawa and Japanese prosecutors cooperated in the events that led to Ghosn landing in the Tokyo Detention House. 

These latest allegations against Ghosn are heavy duty compared to any form of misfiling with the stock-exchange. This time they charged him with saddling the carmaker with US$16.6 million in personal investment losses. 

Ghosn is still unable to defend himself. He likely sits in a solitary cell. There's a strict wakeup call of 7 a.m. and lights out at 9 p.m., with 30 minutes of exercise each day and a shower twice a week, lawyers and former detainees say. Those detained can wear their own clothes, and order food from a pre-approved menu, but it's easy to lose track of time and self in the clock-free, barren solo cell. 

It will be fascinating to see if he can reclaim his reputation and former glory once he gets his time in court. And fascinating to see if the triple auto alliance survives.

At the time of publication McMillan had no position in the securities discussed.